Can Common Institutional Investors in Supply Chains Decode the Bullwhip Effect? Evidence From Order Backlog Mispricing

Abstract

This paper examines the role of supply chain common institutional investors (i.e., who own stocks of both upstream suppliers and their downstream customers in a supply chain) in the valuation of upstream supplier firms’ order backlog information. Based on the theory and evidence that backlog orders’ predictive power is diminished further in a supply chain due to the bullwhip effect, we hypothesize and find that the overpricing of order backlog is mainly driven by upstream rather than downstream firms. More importantly, we use both hedge portfolio methods and Fama-MacBeth regressions to show that common institutional investors in a supply chain can utilize their knowledge to better incorporate the bullwhip effect and mitigate the magnitude of order backlog mispricing. Further, we find that the overpricing of second-tier suppliers’ backlog orders and thus, the role of supply chain common institutional investors is more pronounced during expansion periods than during recession periods. Overall, we highlight the role of institutional supply chain knowledge in improving pricing efficiencies of complex supply chain dynamics.